Retirement provision: step-by-step turnaround in life insurance

The long slide in interest rates for life insurance seems to have come to an end.

Retirement provision: step-by-step turnaround in life insurance

The long slide in interest rates for life insurance seems to have come to an end. According to industry experts, it will be a while before the old-age provision classic generates significantly more income across the board, despite higher interest rates on the capital market. "The downward trend in the current interest rates of private pension insurance should be over," expects Lars Heermann from the rating agency Assekurata. "The majority of life insurers should keep the current interest rate stable and wait and see." Industry leader Allianz Leben, however, is sending an upward signal.

Slight increase in the guaranteed interest rate

Assekurata anticipates a slight increase in the current interest rate from the current 2 percent to around 2.10 percent in the coming year for classic private pension insurance policies. According to Heermann, it could be a little more for newer life insurance products with a reduced guarantee, which are now almost exclusively offered. He assumes an increase from the current 2.05 percent to an average of around 2.20 percent. "These are not huge leaps, but it is at least a trend reversal after falling interest rates in recent years." The expert considers a large-scale increase in current interest rates to be unlikely in the coming years as well.

Allianz Leben will increase the current interest on life insurance policies in the coming year. Allianz Leben CEO Katja de la Viña spoke of a clear signal. For other insurers, such as Alte Leipziger, the amount will not change in 2023.

The current interest on classic life insurance consists of the guaranteed interest rate, which has been only 0.25 percent for new contracts since the beginning of 2022 according to a decision by the Federal Ministry of Finance. Actuaries (Deutsche Aktuarvereinigung) recommend leaving the so-called maximum technical interest rate at 0.25 percent in 2024.

"We don't just look at this one year in which interest rates on the market rose again, but also include various factors," explained Herbert Schneidemann, chairman of the DAV. "The interest rate situation on the capital market must first stabilize at this level before we can recommend a higher maximum technical interest rate."

criticism from consumer advocates

Old contracts still yield up to four percent here. In addition, there is the profit participation that life insurers set every year for all contracts depending on the economic situation and the success of their investment strategy. Current interest only relates to the savings portion after deducting acquisition and administration costs, among other things.

Consumer advocates have criticized the costs for years as too high. "The acquisition and sales costs are the largest block of costs. With every reduction in the guaranteed interest rate, we have demanded that the costs have to go down first," reports insurance expert Lars Gatschke from the Federal Association of Consumer Organizations (vzbv). For the time being, he too does not expect interest rates on life insurance policies to rise on a larger scale.

In his view, one reason is the capital buffer (additional interest reserve) that the insurance companies had to build up during the lull in interest rates in order to fulfill the high promises made in the past. "In order to build up the additional interest reserve, the insurers sold their silverware, now the books mainly contain low-interest fixed-interest securities that hardly yield anything."

The rising interest rates on the capital market have also created so-called hidden burdens in the balance sheets of life insurers, which Heermann currently estimates at around 50 billion euros. The companies do not have to dismantle them. However, the hidden burdens limit the flexibility of insurers' investment strategies because they tie up capital. "I could imagine that the relief in the additional interest reserve will initially be used to reduce hidden burdens."

Dampened expectations

In his estimation, the capital buffer should be fully funded at almost 100 billion euros by the end of 2022 thanks to the rise in interest rates. "This year, around 3 billion euros should be released from the additional interest reserve, in the coming years it should be around 4 to 5 billion euros a year, provided that interest rates on the capital market do not fall."

Heermann believes that the sharp rise in inflation will dampen demand for old-age provision products. "Life insurers will feel the effects of disposable income in new business." New business had already declined in the second half of the year. "Government relief measures such as the gas and electricity price brake will not result in customers buying life insurance in droves." The expert does not expect a wave of cancellations for current contracts, "even if one or the other customer dissolves his private pension plan for financial reasons."

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